Macro Midterm Questions

REVERSE rr --> 200/1000 ---> .2 1/.2 * Deposit ---> 5*1000 ---> 5000

How much money does this bank create?

Steady-state calculation: what do the variables stand for? what is the steady-state of unemployment.

variable on top of what you are trying to find rate of. Works for a number of non-employment related scenarios. Let s denote the rate of job separation, the fraction of employed individuals who lose or leave their jobs each month. Let f denote the rate of job finding, the fraction of unemployed individuals who find a job each month. In a steady state of unemployment, fU = sE. (Number unemployed people finding jobs = number of employed leaving jobs).

employed  unemployed labor force not in the labor force  unemployment rate  labor force participation rate frictional unemployment: structural unemployment

working at a paid job not employed but looking for a job all employed plus unemployed persons not employed, not looking for work percentage of the labor force that is unemployed the fraction of the adult population that "participates" in the labor force The unemployment caused by the time it takes workers to search for a job. Caused often by sectoral shift (change in the composition of demand among industries). Like a tech change or a new trade agreement. When the real wage is above the level that equilibrates supply and demand, the quantity of labor supplied exceeds the quantity demanded. (wage rigidity)

ISLM model together plotted on what IS curve LM curve

plot interest rate and output (y) on bottom. IS curve: Y=C(y-t)+I(r)+G LM Curve: M/P=L(r,y)

Cause of great depression: fall in spending on goods and services. Or perhaps banks were failing to get proper funding out for investment. Or perhaps an increase in taxes and reduction in government spending. -what kind of shift would this be? Other example: it was a contraction in the money supply. did not result in rise of interest rate, so which one was it?

These would all be a contractionary shift in IS curve. shift left in LM curve. contraction in IS.

Pigou effect: The debt-deflation theory liquidity trap. Forward guidance: Quantitative Easing:

(lower prices make income higher) As prices fall and real money balances rise (on the IS curve) consumers should feel wealthier and spend more. This increase in consumer spending should cause an expansionary shift in the IS curve, also leading to higher income. (fall in price makes income lower) A fall in the price level raises the real amount of this debt—the amount of purchasing power the debtor must repay the creditor. Therefore, an unexpected deflation enriches creditors and impoverishes debtors. Debtors tend to spend more than creditors, so this lowers income. expansionary monetary policy works by reducing interest rates and stimulating investment spending. But if interest rates have already fallen almost to zero, then perhaps aggregate demand, production, and employment may be "trapped" at low levels. in this situation, one possibility is that a central bank could try to lower longer-term interest rates. It can accomplish this by committing to keep the target interest rate low for an extended period of time. for example, it could buy long-term government bonds, mortgages, and corporate debt and thereby lower the interest rates on these kinds of loans, a policy sometimes called quantitative easing.

CHAPTER 2 BASKET CPI 2012 $350 100 2013 $370 105.7 2014 $400 114.3 2015 $410 117.1 Calculate inflation rate for each year.

0, 5.7, 8.1, 2.5.

CHAPTER 2: GDP calculation

GDP: Y≈C+I+G+NX

Shift down in IS. model short term and long term

lm shifts down to meet longterm change in IS

CHAPTER 2: The percentage change in (X*Y) If your hourly wage rises 5% and you work 7% more hours, then: The percentage change in (X/Y) Nominal GDP rises 9% and real GDP rises 4%. find the GDP deflator

= the percentage change in X + the percentage change in Y. your wage income rises approximately 12% = the percentage change in X - the percentage change in Y. 5%.

An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one part-time job, 5 have two part-time jobs, 10 would like to work and are looking for jobs, 10 would like to work but are so discouraged they have given up looking, 10 are running their own businesses, 10 are retired, and 10 are small children. Calculate the labor force and the labor-force participation rate. Calculate the number of unemployed and the unemployment rate.

70 & 77.8 (70/90) b/c population at working age. 10 unemployed. 10/70 unemployment rate.

Suppose that the money demand (M/P)d = 800 - 50r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is fixed at 5. a. Graph the supply and demand for real money balances. b. What is the equilibrium interest rate? c. What happens to the equilibrium interest rate if the supply of money is reduced from 2,000 to 1,500? d. If the central bank wants the interest rate to be 4 percent, what money supply should it set?

8 rises to 10 3000

Use the IS-LM diagram to describe the short-run and long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money balances. c) An increase in taxes.

An increase in taxes reduces disposable income for consumers, shifting the IS curve to the left, as shown in the figure. In the short run, output and the interest rate decline to Y2 and r2 as the economy moves from point A to point B. Initially, the LM curve is not affected. In the longer run, prices begin to decline because output is below its long-run equilibrium level, and the LM curve then shifts to the right because of the increase in real money balances. Interest rates fall even further to r3 and, thus, further stimulate investment and increase income. In the long run, the economy moves to point C. Output returns to Y, the price level and the interest rate are lower, and the decrease in consumption has been offset by an equal increase in investment.

Use the IS-LM diagram to describe the short-run and long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money balances. a) An increase in the money supply.

An increase in the money supply shifts the LM curve to the right in the short run. This moves the economy from point A to point B in the figure: the interest rate falls from r1 to r2, and output rises from Y to Y2. The increase in output occurs because the lower interest rate stimulates investment, which increases output. Since the level of output is now above its long-run level, prices begin to rise. A rising price level lowers real balances, which raises the interest rate. As indicated in the figure, the LM curve shifts back to the left. Prices continue to rise until the economy returns to its original position at point A. The interest rate returns to r1, and investment returns to its original level. Thus, in the long run, there is no impact on real variables from an increase in the money supply.

Connection between ISLM and AD curve (example: increase in income) how is AS affected?

Expansionary monetary policy (increase in money supply, shift LM right) or expansionary fiscal policy (increase in government purchases or decrease in taxes, shift in IS right) show an increase in income. ^ can be shown as a shift in AD. ISLM informs AD curve, and AS curve shifts from short term to long term to return to equilibrium Y.1

Expected deflation: model the effects (2 directions)

For LM p fall --> LM right --> higher y and lower pigious: lower prices make people spend more --> consumption rise --> IS right --> Y rise i=r+inflation, so deflation --> r fall --> investment fall --> IS left --> y fall.

The Fed is considering two alternative monetary policies: holding money supply constant and letting the interest rate adjust or adjusting the money supply to hold the interest rate constant In the IS-LM model, which policy will better stabilize output under the following conditions? Explain your answer. a. All shocks to the economy arise from exog- enous changes in the demand for goods and services. b. All shocks to the economy arise from exog- enous changes in the demand for money.

Holding the money supply constant will be more stabilizing. Suppose, for example, that there is an increase in government spending that pushes up the IS curve. If the money supply remains constant, the short-run equilibrium occurs at the intersection of the initial LM curve and the new IS curve. If the money supply rises to offset the rise in interest rates, however, the short-run equilibrium will occur at the intersection of the new, lower, LM curve and the new IS curve. It is easy to see that a policy of targeting the interest rates amplifies demand-based fluctuations in output. With interest rate targeting, expansionary demand shocks are matched with expansionary monetary policy, and contractionary demand shocks are matched with contractionary monetary policy. y. Interest rate targeting will be more stabilizing. Since the interest rate is not allowed to change, the Fed must offset any change in the LM curve. For example, if money demand rises, the LM curve will shift up, causing the interest rate to rise. The Fed will respond by increasing the money supply, which pushes the LM curve, and the interest rate, back down to its initial level. Output fluctuates only to the extent that the Fed does not respond immediately to the LM shocks.

Use the IS-LM diagram to describe the short-run and long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money balances. b) An increase in government purchases.

IN LONG TERM TERM, PRICES SHIFT, SO THE LM CURVE SHIFTS An increase in government purchases shifts the IS curve to the right, and the economy moves from point A to point B, as shown in the figure below. In the short run, output increases from Y to Y2, and the interest rate increases from r1 to r2. The increase in the interest rate reduces investment and "crowds out" part of the expansionary effect of the increase in government purchases. Initially, the LM curve is not affected because government spending does not enter the LM equation. After the increase, output is above its long-run equilibrium level, so prices begin to rise. The rise in prices reduces real balances, which shifts the LM curve to the left. The interest rate rises even more than in the short run. This process continues until the long-run level of output is again reached. At the new equilibrium, point C, interest rates have risen to r3, and the price level is permanently higher.

ISLM model Maps what on to what? How do they interact with AD/AS model? What are the curves based off of? General theory of this model?

IS and LM curves together determine the interest rate and national income. Equilibrium here determines AG Demand curve of previous AD/AS model. IS Curve: stands for "investment" and "saving." LM Curve: stands for "liquidity" and "money," (supply and demand for money). an economy's total income is, in the short run, determined largely by the spending plans of households, businesses, and government. The more people want to spend, the more goods and services firms can sell. The more firms can sell, the more output they will choose to produce and the more workers they will choose to hire.

IS CURVE based off of which plots the line is? its slope is upward sloping because

Keynsian cross expenditure and on bottom: (income, Y) expenditure c+i+g. investment and g are fixed. so only thing that changes is level of consumption (which is based on taxes and consumption). MPC rise in income --> more expenditure

Use the Keynesian cross model to predict the impact on equilibrium GDP of the following. In each case, state the direction of the change and give a formula for the size of the impact. a. An increase in government purchases b. An increase in taxes c. Equal-sized increases in both government purchases and taxes

Pe line shift up by 1/(1-mpc) Pe line shift down by mpc/(1-mpc) equal sized, but government has larger effect on Pe.

Consider the economy of Hicksonia. a. The consumption function is given by C= 300+ 0.6(Y- T). The investment function is I = 700 - 80r. Government purchases and taxes are both 500. For this economy, graph the IS curve for r ranging from 0 to 8. The money demand function in Hicksonia is (M/P)d M/P =Y - 200r. The money supply M is 3,000 and the price level P is 3. A. Find the equilibrium interest rate r and the equilibrium level of income Y. B. Suppose that government purchases are increased from 500 to 700. How does the IS curve shift? What are the new equilibrium interest rate and level of income? C. Suppose instead that the money supply is increased from 3,000 to 4,500. How does the LM curve shift? What are the new equilib- rium interest rate and level of income?

R=5 Y=2000 IS UP R = 6.25 Y = 2250 LM DOWN R: 3.75 Y: 2250

Suppose that the demand for real money balances depends on disposable income. That is, the money demand function is M/P = L(r,Y - T). Using the IS-LM model, discuss whether this change in the money demand function alters the following. a. The analysis of changes in government purchases b. The analysis of changes in taxes

The analysis of G is unaffected by making money demand depend on disposable income instead of total expenditure. An increase in G shifts the IS curve to the right, as in the standard case. The LM curve is unaffected by this increase. Thus, the analysis is the same as it was before. A tax cut causes disposable income Y-T to increase at every level of income Y. This increases consumption for any given level of income as well, so the IS curve shifts to the right, as in the standard case. If money demand depends on disposable income, however, then the tax cut increases money demand, so the LM curve shifts upward. Thus, the analysis of a change in taxes is altered drastically by making money demand dependent on disposable income. It is actually possible for a tax cut to be contractionary depending on the relative magnitudes of the IS and LM shifts.

6. Monetary policy and fiscal policy often change at the same time. a. Suppose that the government wants to raise investment but keep output constant. In the IS-LM model, what mix of monetary and fiscal policy will achieve this goal? b. In the early 1980s, the U.S. government cut taxes and ran a budget deficit while the Fed pursued a tight monetary policy.What effect should this policy mix have?

The government should adopt a loos e monetary policy and a tight fiscal policy. In the new equilibrium, the interest rate is lower, so that investment is higher. The tight fiscal policy - reducing government purchases for example - offsets the effect of this increase in investment on output. The policy mix in the early 1980s did exactly the opposite. Fiscal policy was expansionary, while monetary policy was contractionary. Such a policy mix shifts the IS curve to the right and the LM curve to the left. The real interest rate rises and investment falls.

Increase in money supply? why?

This is called: monetary transmission mechanism. An increase in the money supply lowers the interest rate, which stimulates investment and thereby expands the demand for goods and services.

Quantity Theory of Money: AGG SUPPLY BASED ON?

Y = F(K, L)

Consider the impact of an increase in thriftiness in the Keynesian cross model. Suppose the consumption function is C = C̅ + c(Y − T) where C̅ is a parameter called autonomous consumption that represents exogenous influences on consumption and c is the marginal propensity to consume. a. What happens to equilibrium income when the society becomes thriftier, as represented by a decline in C̅ ? b. What happens to equilibrium saving? c. Why do you suppose this result is called the paradox of thrift? d. Does this paradox arise in the classical model of Chapter 3? Why or why not?

a) Equilibrium income falls (at any level, people consume less. b) Equilibrium saving is unchanged because saving is equal to investment which is fixed. c) Perhaps because even though thriftiness is increased, savings remains unaffected. Increased thriftiness leads to a fall in income, so thriftiness is not necessary a good thing in the macro perspective. d) No because in chapter three, investment was based on the interest rate and consumption was decided by income-taxes. Output is fixed, so with an increase in thriftiness, consumption decreases and saving increases, and interest rate goes down and both investment and saving is higher.

1. According to the IS-LM model, what happens in the short run to the interest rate, income, consumption, and investment under the follow- ing circumstances? Be sure your answer includes an appropriate graph. a. The central bank increases the money supply. b. The government increases government purchases. c. The government increases taxes. d. The government increases government purchases and taxes by equal amounts.

a. R: down Y: up C: up I: up (because interest down) b. R: up Y: up C: up I: down c. R: down Y: down C: down I: up d. (gov effect > tax effect) R: up Y: up C: down (small increase in y offset by increase in taxes) I: down.

Use the IS-LM model to predict the short- run effects of each of the following shocks on income, the interest rate, consumption, and investment. In each case, explain what the Fed should do to keep income at its initial level. Be sure to use a graph in each of your answers. a. After the invention of a new high-speed computer chip, many firms decide to upgrade their computer systems. b. A wave of credit card fraud increases the fre- quency with which people make transactions in cash. c. A best-seller titled Retire Rich convinces the public to increase the percentage of their income devoted to saving. d. The appointment of a new "dovish" Federal Reserve chair increases expected inflation

a. Y. up R up C up I up to keep income: decrease MS b. Y down R up C down I up to keep income: raise MS c. Y down R down C down I up to keep income: raise ms d. Y up R down C up I up to keep income: decrease ms

If congress raises taxes, how can the fed keep price levels the same? whats the drawback? what if it keeps income at previous levels?

if it wants to keep to income at previous levels, it can increase money supply, lowering interest and increasing production. but prices are permanently lower.

If marginal propensity to consume is .6, calculate gov and tax multiplier.

gov multiplier: 1/(1-.6) ---> 2.5 -.6/(1-.6) ---> -1.5

Determine whether each of the following state- ments is true or false, and explain why. For each true statement, discuss whether there is anything unusual about the impact of monetary and fiscal policy in that special case. a. If money demand does not depend on the interest rate, the LM curve is vertical b. If investment does not depend on the interest rate, the IS curve is vertical. d. If money demand does not depend on income, the LM curve is horizontal. d. If money demand is extremely sensitive to the interest rate, the LM curve is horizontal.

a. true (it would be equal to: M/P = L(Y) (income is set) monetary policy has no effect, only fiscal policy. b. true (if investment doesnt rely on interest rate, nothing does) fiscal policy has no effect via interest rate, so monetary policy has full effect. c. true; M/P=L(r), so interest rate is fixed. Fiscal policy is very effective: output increases by the full amount that the IS curve shifts. Monetary policy is also effective: an increase in the money supply causes the interest rate to fall, so the LM curve shifts down. d. close to horizontal. If money demand is very sensitive to the interest rate, then fiscal policy is very effective: with a horizontal LM curve, output increases by the full amount that the IS curve shifts. Monetary policy is now completely ineffective: an increase in the money supply does not shift the LM curve at all.

shocks to IS curve what type? shocks to LM curve what type?

fiscal: change in gov, or taxes; shocks to I or C. monetary increase in money supply; shocks like more demand for money

Equilibrium with Keynsian cross

if planned expenditure is above actual expenditure, there is not enough inventory, so production/wages ramp up. if actual expenditure is above planned expenditure, inventory piles up and prodution/income/wages fall.

Shifts up to Keynesian cross (2) how much shift up for both?

increase in gov purchase: The multiplier on changes in government purchases, 1/(1 - MPC) Decrease in taxes: The multiplier on changes in taxes, -MPC/(1 - MPC),

Shifts in LM curve Movement in LM curve.

increase in money supply --> LM to right. increase in price --> LM to left. increase in income --> movement up LM. increase in interest rate --> LM To left.

LM CURVE plots equation: equilibrium is based on

interest rate and output (y) M/P=L(r, Y) Is the real supply of money. It is equal to liquidity which is based on the interest rate. if the interest rate is above the equilibrium level, the quantity of real money balances supplied exceeds the quantity demanded. People try to buy bonds. Excess demand means banks can lower their interest rate. Conversely, if the interest rate is below the equilibrium level, so that the quantity of money demanded exceeds the quantity supplied, individuals try to obtain money by selling bonds or making bank withdrawals. To attract now-scarcer funds, banks and bond issuers respond by increasing the interest rates they offer.

Shift up in IS curve due to shifts up in gov or taxes: IS curve maps: IS curve shifts if By how much?

interest rate and output/income Changes in fiscal policy that raise the demand for goods and services shift the IS curve to the right. Changes in fiscal policy that reduce the demand for goods and services shift the IS curve to the left. by gov / tax multiplier

In Keynsian cross: assume that the consumption function is given by C = 120 + 0.8 (Y - T). Planned investment is 200; government purchases and taxes are both 400. a. Graph planned expenditure as a function of income. b. What is the equilibrium level of income? c. If government purchases increase to 420, what is the new equilibrium income? What is the multiplier for government purchases? d. What level of government purchases is needed to achieve an income of 2,400? (Taxes remain at 400.) e. What level of taxes is needed to achieve an income of 2,400? (Government purchases remain at 400.)

plug into Pe=C+I+G --> pe=.8y+400 set pe equal to y, to find equilibrium point. y --> 2000 new income: 2400 multiplier for government purchases: 5 G=480 t=300

short term supply curve why?

price are fixed in the short term

3. Let's examine how the goals of the Fed influ- ence its response to shocks. Suppose that in scenario A the Fed cares only about keeping the price level stable and in scenario B the Fed cares only about keeping output and employment at their natural levels. Explain how in each scenario the Fed would respond to the following. a. An exogenous decrease in the velocity of money. b. An exogenous increase in the price of oil.

price stable: want to avoid longrun adjustment to lower price. so increase money supply. increasing the money supply. nothing fed can do. increase money supply.

REVERSE 10 9 8 7 6 5 4 3 2 1 yes, hire until the 5th worker. No, W/P> MPL.

suppose W/P =6. If L=3 should firms hire more or less labor? L=7 should firms hire more or less labor?

In 2007, $500 billion in transactions. money supply = $100 billion. What is the velocity?

5

An economy has the following money demand function: (M/P ) = .2Y/i^(1⁄2) a. Derive an expression for the velocity of money. What does velocity depend on? Explain why this dependency may occur. b. Calculate velocity if the nominal interest rate i is 4 percent. c. If output Y is 1,000 units and the money supply M is $1,200, what is the price level P ?Suppose the announcement of a new head of the central bank, with a reputation of being soft on inflation, increases expected inflation by 5 percentage points.According to the Fisher effect, what is the new nominal interest rate? d. Suppose the announcement of a new head of the central bank, with a reputation of being soft on inflation, increases expected inflation by 5 percentage points.According to the Fisher effect, what is the new nominal interest rate? e. Calculate the new velocity of money. f. If, in the aftermath of the announcement, both the economy's output and the current money supply are unchanged, what happens to the price level? Explain why this occurs. g. If the new central banker wants to keep the price level the same after the announcement, at what level should she set the money supply?

5i^1/2 = v .04^1/2 *5 --> 1 1200 = 0.2*P*1000/0.2 HENCE PRICE LEVEL = 1.2 9% 1.5 1.8 price. infla 800.

In the country of Wiknam, the velocity of money is constant. Real GDP grows by 3 percent per year, the money stock grows by 8 percent per year, and the nominal interest rate is 9 percent. What is a. the growth rate of nominal GDP? b. the inflation rate? c. the real interest rate?

nominal: 8 inflation rate: 5 real interest 4

Equilibrium is determined by what? What is at equilibrium? What does the graph look like?

At the equilibrium interest rate, the demand for goods and services equals the supply. ALSO Y/L=MPL

CHAPTER 2 REVERSE 2018 real: 58,300 2018 nominal: 52,000 2017 real: 50,000 2018: nominal: 51,400 2017 GDP deflator: 102.8 2018 GDP deflator: 112 2018 inflation rate: 8.9

Calc real GDP and nominal GDP for 2018 and 2017. GDP deflator for both. Calculate inflation for 2018.

DETERMINANTS OF DEMAND consumption based on If MPC is .7 what does this mean?

Disposable income (Y-T) T is decided by government. Y's effect is determined by consumption function, which shows how much consumption increases with an increase of Y. Y goes to consumption and saving. How much is allocated to either is determined by the interest rate. if the MPC is 0.7, then households spend 70 cents of each additional dollar of disposable income on consumer goods and services and save 30 cents.

quantity theory of money equation (2) what do both sides tell us Which variables are fixed?

Left tell us about money supply: M is quantity of money. V is income velocity of money (the number of times a dollar bill enters someone's income in a given period). Right tells us about money demand: Y is the real GDP (price*quantity). P is the GDP deflator (inflation) and PY is nominal GDP. P+Y in nominal gdp growth rate Y and V are fixed, showing that any changes in money quantity M must result in a change in P (price levels). so the CB has control over inflation levels.

DETERMINANTS OF SUPPLY OF FUNDING How much labor is hired? what are real wages what is national income what is economic profit

People hire up until P X MPL = W. In other words, the firm hires up to the point at which the marginal product of labor equals the real wage. MPL=W/P. W/P is the real wage—the payment to labor measured in units of output rather than in dollars. Y ≈ (MPL x L) + (MPK x K) . national income is equal to total labor income + total capital income. economic profit of the owners of the firms: Y ≈ (MPL x L) + (MPK x K) + Economic Profit.

Okuns law: if the unemployment rate rises from 5 to 7 percent, then real GDP growth would be

Percentage Change in Real GDP = 3% - (-2 x (7% - 5%)) → -1%.

Suppose that a country experiences a reduction in productivity—that is, an adverse shock to the production function. a. What happens to the labor demand curve? b. How would this change in productivity affect the labor market—that is, employment, unemployment, and real wages—if the labor market is always in equilibrium? c. How would this change in productivity affect the labor market if unions prevent real wages from falling?

Production function is the diminishing returns arch that maps output and input (on bottom). (Y) based on amount of capital and labor put in: Y=y(k,l) This shifts down, showing lower y. This then leads to Labor supply and labor demand graf. shows as a shift left in labor demand. equilibrium means fixed labor supply though, so the shift left will mean no change to employment but reduction in wages. significant fall in employment.

How do these affect the money supply? increase in monetary base Low reserve-deposit ratio Low currency-deposit ratio

increase in money supply money multiplier rise → more money supply. → more bank reserves → more loans → raise money multiplier → more money supply.

Reasons why the CPI may overstate inflation how much overstate

Substitution bias: The CPI uses fixed weights, so it cannot reflect consumers' ability to substitute toward goods whose relative prices have fallen. Introduction of new goods: The introduction of new goods makes consumers better off and, in effect, increases the real value of the dollar. But it does not reduce the CPI, because the CPI uses fixed weights. Unmeasured changes in quality: Quality improvements increase the value of the dollar, but are often not fully measured. Around 1.1%

REVERSE nominal gdp 1000 3000 real gdp 1000 2000 implicit price deflator for gdp 100 150 CPI base year quantity 2010, so 160% b. hot dog 100 hamburger 33.3 GDP deflator: 50 CPI: 60

Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as the CPI. b. By what percentage did prices rise between 2010 and 2015? Give the answer for each good and also for the two measures of the overall price level. Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference.

CHAPTER 2 REVERSE the value of the firm's output less the value of the intermediate goods that the firm purchases. Farmer's VA = $1 Miller's VA = $3 Baker's VA = $3 GDP = $6

Value added approach to calculating GDP is what?

REVERSE Interest falls, investment rises. Investment needs to fall to offset increase in G, so interest rate will rise (higher interest rate raises the cost of borrowing and encourages business to decrease investment). This is the same as an increase government spending or a reduction in taxes. Then the high interest rate encourages people to save more, leading to a large supply of loanable funds, and this leads interest rate to fall, leading investment to rise. I shifts to right, there is a shift up of investment but investment doesn't increase because there is a fixed amount of savings, so the only thing that happens is that the interest rate rises.

What happens to interest rate if government spending increases? What happens with a reduction in public saving. What does this () in the interest rate cause? What if investment demand rises due to new technology

Tina is the sole owner of Tina's Lawn Mowing, Incorporated (TLM). In one year, TLM collects $1,000,000 from customers to mow their lawns.TLM's equipment depreciates in value by $125,000.TLM pays $600,000 to its workers, who pay $140,000 in taxes on this income.TLM pays $50,000 in corporate income taxes and pays Tina a dividend of $150,000.Tina pays taxes of $60,000 on this dividend income.TLM retains $75,000 of earnings in the business to finance future expansion. How much does this economic activity contribute to each of the following? a. GDP b. NNP c. National income d. Compensation of employees e. Proprietors' income f. Corporate profits g. Personal income h. Disposable personal income

a 1,000,000 b 875,000 c 875,000 d 600,000 e 0 f 75,0000 g 150,000 h 90,000

shifts of the AD curve caused by?

a) decrease in money supply b) increase in money supply

money demand function what does the equation show? what do both sides mean? How does this relate to velocity?

(M/P) = Ky shows how much money people want to hold. M/P: M/P is the real money balances. It shows the purchasing power of money (money quantity corrected by price). k is a constant that tells us how much people want to hold for every dollar of income. k = 1/V When people hold lots of money relative to their incomes (k is high), money changes hands infrequently (V is low).

Suppose that an economy's production function is Cobb-Douglas with parameter alpha 0.3. a. What fractions of income do capital and labor receive? b. Suppose that immigration increases the labor force by 10 percent.What happens to total output (in percent)? c. Suppose that a gift of capital from abroad raises the capital stock by 10 percent.What happens to total output (in percent)? d. Suppose that a technological advance raises the value of the parameter A by 10 percent. What happens to total output (in percent)?

.70 to labor, .30 to capital 1.10^.70 -->6.9 1.10^.30 -->2.9 increase by 10%

CHAPTER 1 Simple model of supply and demand 1. equation for supply 2. equation for demand 3. what does the graph look like 4. shift up in income 5. shift up in material price. 6. Qd=60-10p+2y. Find quantity demanded if aggregate income is $10 and the price of pizza is $2. What if price rises to $3?

1. S=S(p, pm). based on price and price of materials. 2. D=D(P,Y). Based on price and income. 3. quantity on bottom, price on left, D slopes down, S slopes up. 4. D to the right --> quantity up, price up. 5. S to the left --> quantity down, price up. 6. quantity 60. price rise to $3 -->50 quantity.

An economy has a monetary base of 1,000 $1 bills. Calculate the money supply in scenarios a. All money is held as currency. b. All money is held as demand deposits. Banks hold 100 percent of deposits as reserves. c. All money is held as demand deposits. Banks hold 20 percent of deposits as reserves. d. People hold equal amounts of currency and demand deposits. Banks hold 20 percent of deposits as reserves. e. The central bank decides to increase the money supply by 10 percent. In each of the above four scenarios, how much should it increase the monetary base?

1000 1000 5000 1667 10% for all

Suppose a country has a money demand function (M/P ) = kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. a. What is the average inflation rate? b. How would inflation be different if real income growth were higher? Explain. c. How do you interpret the parameter k? What isitsrelationshiptothevelocityofmoney? d. Suppose, instead of a constant money demand function, the velocity of money in this economy was growing steadily because of financial innovation. How would that affect the inflation rate? Explain.

12/p =4 --> 12-p=4 -->p=7 if income higher, inflation higher 1/k is velocity. k shows how much growth in income affects demand for money. when higher income leads to a lot of holding of money, the velocity decreases. inflation increases, because v rise --> lower k --> people hold less money --> inflation rise.

U.S. adult population by group, June 2006 Number employed = 144.4 million Number unemployed = 7.0 million Adult population = 228.8 million Use the above data to calculate: the labor force the number of people not in the labor force the labor force participation rate the unemployment rate

151.4 million people 77.4 million people 66.2% 4.6%

The residents of a certain dormitory have collected the following data: people who live in the dorm can be classified as either involved in a relationship or uninvolved. Among involved people, 10 percent experience a breakup of their relationship every month. Among uninvolved people, 5 percent enter into a relationship every month.What is the steady-state fraction of residents who are uninvolved?

2/3

In the nation of Wiknam, people hold $1,000 of currency and $4,000 of demand deposits in the only bank, Wikbank.The reserve-deposit ratio is 0.25. What are the money supply, the monetary base, and the money multiplier? Wiknam's central bank wants to increase the money supply by 10 percent. Should it buy or sell government bonds in open-market opera- tions? Assuming no change in the money multiplier, calculate, in dollars, how much central bank needs to transact.

5000 mb, 2.5 mm, 12500 ms. cb should buy bonds. $500 worth of bonds.

If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreas- ing returns to scale. If it causes output to increase by more than 10 percent, the production func- tion is said to exhibit increasing returns to scale. Why might a production function exhibit decreasing or increasing returns to scale?

Decreasing returns to scale: if we double the amounts of capital and labour, and output less than doubles; there is a fixed factor such as land in the production function Increasing returns to scale: This may happen if specialization of labour becomes greater as the population grows.

Demand side: Logic behind equilbirum --why a high interest rate eventually falls; why a low interest rate rises. what shifts the investment curve?

If the interest rate is too low, investors want more of the economy's output than households want to save. When this happens, the interest rate rises. Conversely, if the interest rate is too high, households want to save more than firms want to invest; because the quantity of loanable funds supplied is greater than the quantity demanded, the interest rate falls. some technological innovations (to take advantage of the innovation, firms must buy new investment goods) tax laws that affect investment investment tax credit

money supply, money demand and velocity together What does this show?

M/P = L(i,Y) = Y/3i money supply is based on money demand, which is based on output/the interest rate. 3i is the velocity of this economy. As velocity increases, money supply falls. As velocity increases, demand for liquidity also falls. as money supply increases, velocity decreases. As demand for money increases (due to an increase in income or decrease in interest rate), velocity falls.

supply of money vs. demand for money What does this mean? What moves to equate? with fisher equation inserted. What happens if fed announces it will increase money supply in future?

M/P= L(i,Y) money supply = money demand. money demand (liquidity) is positively related to income and inversely related to interest rate. M/P=L(r+expected inflation, Y). people expect inflation, so via fisher effect, the nominal interest rate rises. This makes people decrease their liquid assets and this leads to oversupply of money (inflation)

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r =4. Solve for i. If the Fed increases the money growth rate by 2 percentage points per year, find i. Suppose the growth rate of Y falls to 1% per year. What will happen to inflation? What must the Fed do if it wishes to keep inflation constant?

M=5, V=0, Y=2. so 5+0=P+2. P=3. inflation is 3. i=r+inflation. i=4+3. ---> i=7 i=9 inflation will rise to 4. (rise 1%). To prevent inflation from rising, Fed must reduce the money growth rate by 1 percentage point per year.

Use the neoclassical theory of distribution to pre- dict the impact on the real wage and the real rental price of capital of each of the following events: a. A wave of immigration increases the labor force. b. An earthquake destroys some of the capital stock. c. A technological advance improves the production function. d. High inflation doubles the prices of all factors and outputs in the economy.

MPL lowers so wage falls --relative capital more scarce, so demand rises. MPK rises so rent rises, relative labor more common so wage fall. improves marginal productivity of capital and labor so wage and rent rise.

Quantity Theory of Money: Maps what on to what? What are supply and demand based off of?

Maps price vs. y maps changes in price (AG Supply) with changes to AG (based on changes in money supply, which go through velocity many times): MV=PY and M/P=KY

CHAPTER 2: Suppose a firm produces $10 million worth of final goods but only sells $9 million worth. Does this violate the expenditure = output identity?

No. the extra 1 million is counted as the firm purchasing its own goods (investment) Therefore output = expenditure

Three ways monetary policy creates/restricts money through banks: lender of last resort? quantitative easing:

OMO (The purchase or sale of government bonds) Reserve requirements (impose a minimum reserve-deposit ratio on banks). An increase in reserve requirements tends to raise the reserve-deposit ratio and thus lower the money multiplier and the money supply. Discount rate: the interest rate that the Fed charges on loans it makes to banks. When banks borrow from the Fed, their reserves increase, allowing them to make more loans and "create" more money. influenced through discount window. fed lends to banks that have trouble getting funding elsewhere. rather than buying short-term Treasury bills, it bought longer-term and somewhat riskier securities. These open-market purchases led to the substantial increase in the monetary base.

Credit cards reduce amount of demand for cash this reduces amount of cash in economy.

Reduced cash → increases velocity → nominal spending to rise→ the aggregate demand curve to shift outward. In the short run, the increase in demand raises the output of the economy—it causes an economic boom. At the old prices, firms now sell more output. Over time, the high level of aggregate demand pulls up wages and prices. As the price level rises, the quantity of output demanded declines, and the economy gradually approaches the natural level of production.

money multiplier: for a bank specifically:

The reserve-deposit ratio rr is the fraction of deposits that banks hold in reserve. The currency-deposit ratio cr is the amount of currency C people hold as a fraction of their holdings of demand deposits D. 1/rr

REVERSE 100 .5 and .5 50 70.7 wage .71 and rent .35 still 50%

a. How much output does the economy produce? b. What are the wage and the rental price of land? c. What share of output does labor receive? d. If a plague kills half the population, what is the new level of output? e. What is the new wage and rental price of land? f. What share of output does labor receive now?

Consider an economy with two sectors: manufacturing and services. Demand for labor in manufacturing and services are described by these equations: Lm = 200 - 6Wm Ls = 100 - 4Ws where L is labor (in number of workers), W is the wage (in dollars), and the subscripts denote the sectors.The economy has 100 workers who are willing and able to work in either sector. a. If workers are free to move between sectors, what relationship will there be between Wm and Ws ? b. Suppose that the condition in part (a) holds and wages adjust to equilibrate labor supply and labor demand. Calculate the wage and employment in each sector. c. Suppose a union establishes itself in manufac- turing and pushes the manufacturing wage to $25. Calculate employment in manufacturing. d. In the aftermath of the unionization of manu- facturing, all workers who cannot get the highly paid union jobs move to the service sector. Calculate the wage and employment in services. e. Now suppose that workers have a reservation wage of $15—that is, rather than taking a job at a wage below $15, they would rather wait for a $25 union job to open up. Calculate the wage and employment in each sector.What is the economy's unemployment rate? not?

a. If workers are free to move between sectors, then the wage in each sector will be equal. If the wages were not equal then workers would have an incentive to move to the sector with the higher wage and this would cause the higher wage to fall, and the lower wage to rise until they were equal. b. Since there are 100 workers in total, LS = 100 - LM. We can substitute this expression into the labor demand for services equation, and call the wage w since it is the same in both sectors: Ls =100- Lm = 100 -4w Lm = 4w Now set this equal to the labor demand for manufacturing equation and solve for w: 4w = 200 - 6w w = $20. Substitute the wage into the two labor demand equations to find LM is 80 and LS is 20 c. If the wage in manufacturing is equal to $25 then LM is equal to 50. d. There are now 50 workers employed in the service sector and the wage wS is equal to $12.50. e. The wage in manufacturing will remain at $25 and employment will remain at 50. If the reservation wage for the service sector is $15 then employment in the service sector will be 40. Therefore, 10 people are unemployed and the unemployment rate is 10 percent.

REVERSE private saving: 1000 public saving: -500 national saving: 500 interest rate: 7 private saving: 1000 public saving: 0 national saving: 1000 interest rate: 2

a. In this economy, compute private saving, public saving, and national saving. b. Find the equilibrium interest rate. c. Now suppose that G is reduced by 500. Compute private saving, public saving, and national saving. d. Find the new equilibrium interest rate.

Suppose that the money demand function takes the form (𝑀/𝑃)& = 𝐿(𝑖, 𝑌) = 𝑌/(5𝑖) a. If output grows at rate g and the nominal interest rate is constant, at what rate will the demand for real money balances grow? b. What is the velocity of money in this economy? c. If inflation and nominal interest rates are constant, at what rate, if any, will velocity grow? d. How will a permanent (once-and-for-all) increase in the level of interest rates affect the level of velocity? How will it affect the subsequent growth rate of velocity?

a. g b. 5i c. constant d. It will cause a one-time increase in the velocity of money, but the velocity will became constant (flatten out) after the initial spike up.

reagan policies Increase in defense spending (G) Big tax decreases (T) What effect on saving? on graph?

both decrease saving both move S to the left

When the government subsidizes investment, such as with an investment tax credit, the subsidy often applies to only some types of investment. This question asks you to consider the effect of such a change. Suppose there are two types of investment in the economy: business investment and residential investment.The interest rate adjusts to equilibrate national saving and total investment, which is the sum of business investment and residential investment. Now sup- pose that the government institutes an investment tax credit only for business investment. a. How does this policy affect the demand curve for business investment? The demand curve for residential investment? b. Draw the economy's supply and demand curves for loanable funds. How does this policy affect the supply and demand for loanable funds? What happens to the equilibrium interest rate? c. Compare the old and the new equilibria. How does this policy affect the total quan- tity of investment? The quantity of busi- ness investment? The quantity of residential investment?

demand curve for business investment shifts out. residential investment doesnt change. loanable funds are set, but the I(r) curve will shift up. This indicates a higher interest rate. Though the amount of investment wont change because loanable funds are set. business investment will increase and this will be met with an increase in residential investment.

Fiscal policy Monetary policy through what mechanism?-if it wants to increase or decrease? liquidity

encompasses the congress' decisions about spending and taxation. refers to fed's decisions about the nation's system of coin, currency, and banking. -through OMO (purchase and sale of government bonds). If it wants to increase money supply it buys bonds, if it wants to decrease money supply it sells bonds. The ease with which an asset can be converted into the medium of exchange and used to buy other things

Suppose that consumption depends on the interest rate. How, if at all, does this alter the conclusions reached in the chapter about the impact of an increase in government purchases on investment, consumption, national saving, and the interest rate?

increase in government purchase shifts saving to the left. This reduces investment and raises the interest rate. If the interest rate rises, then consumption falls.

Hyperinflation: Seigniorage: Four issues of inflation: Unexpected inflation A benefit of inflation: Real effect of inflation: real variables: nominal variables classical dichotomy. ex ante real interest rate, ex post real interest rate.

extraordinarily high inflation (exceeds 50% per month). Picture large bundles of cash. The revenue raised by the printing of money. menu cost; shoeleather; tax law; catalogue redistributes wealth. if inflation turns out to be lower than expected, the creditor wins and the debtor loses because the repayment is worth more than the two parties anticipated. Some economists believe that a little bit of inflation—say, 2 or 3 percent per year—keeps real wage low enough for employment. doesnt change things. wages relative to living costs. All variables measured in physical units, such as quantities and relative prices. —variables expressed in terms of money. real and nominal variables can be analyzed separately The real interest rate that the borrower and lender expect when the loan is made the real interest rate that is actually realized, called the ex post real interest rate.

A farmer grows a bushel of wheat and sells it to a miller for $1.The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6.The engineer eats the bread.What is the value added by each person? What is the bread's contribution to GDP?

farmer: 1 miller: 2 baker: 3 bread contribution to gdp: 6

For example: 60 loaves of bread are sold in a given year at $0.50 per loaf. Quantity of money in the economy is $10. Find V

for $30 of transactions per year to take place with $10 of money, each dollar must change hands three times per year. (P*Y=30)/10 money supply

Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports. Boeing sells an airplane to the U.S.Air Force. Boeing sells an airplane to American Airlines. Boeing sells an airplane to Air France. Boeing sells an airplane to Amelia Earhart. Boeing builds an airplane to be sold next year.

gov consumption export consumption investment

a drought that destroys crops, new environmental protection law that requires firms to reduce their emissions of pollutants. Firms pass on the added costs to customers in the form of higher prices. An increase in union aggressiveness. what happens? What are two ways that the government can offset this? and what are the drawbacks for both?

gov can increase AD to keep output normal, but this increases prices. gov can decrease AD to keep prices normal but output will be low.

long term supply curve why?

in longterm output doesnt increase but price do.

Explain how each of the following events affects the monetary base, the money multiplier, and the money supply. The Federal Reserve buys bonds in an open- market operation. b. The Fed increases the interest rate it pays banks for holding reserves. c. The Fed reduces its lending to banks through its Term Auction Facility. d. Rumors about a computer virus attack on ATM machines increase the amount of money people hold as currency rather than demand deposits. e. The Fed flies a helicopter over 5th Avenue in NewYork City and drops newly printed $100 bills.

increase monetary base, money supply increase, money multiplier not changed. money multiplier decrease, monetary base grow (as banks hold more reserves), money supply decrease. monetary base fall, money supply fall, money multiplier no change. monetary base increase, money multiplier will fall as banks hold less reserve, this will decrease money supply. monetary base rise, money supply increase.

Suppose that an increase in consumer confidence raises consumers' expectations about their future income and thus increases the amount they want to consume today.This might be interpreted as an upward shift in the consumption function. How does this shift affect investment and the interest rate?

interest rate rise, investment falls.

CHAPTER 2 CPI: CPI for a given month: Laspeyres index: Paasche index: GDP Deflator: Inflation based on GDP deflator: Calculate inflation based on CPI (monthly, yearly) annualized GDP rate:

measures the overall level of prices and the typical household cost of living based on a basket of goods. (cost of basket in that month/cost of basket in base period) *100 a price index with a fixed basket of goods. a changing basket. (Nominal GDP / Real GDP) *100. (New GDP deflator - old GDP deflator)/(old GDP deflator) *100 (new CPI-oldCPI)/old CPI. (compare this to last month, or same month from last year). (new GDP-old GDP)^4. minus 1.

In each of the following scenarios, explain and categorize the cost of inflation. a. Because inflation has risen, the J. Crew clothing company decides to issue a new catalog monthly rather than quarterly. b. Grandpa buys an annuity for $100,000 from an insurance company, which promises topay him $10,000 a year for the rest of his life. After buying it, he is surprised that high inflation triples the price level over the next few years. c. Maria lives in an economy with hyperinfla- tion. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. d. Gita lives in an economy with an inflation rate of 10 percent. Over the past year, she earned a return of $50,000 on her million- dollar portfolio of stocks and bonds. Because her tax rate is 20 percent, she paid $10,000 to the government. e. Your father tells you that when he was your age, he worked for only $4 an hour. He suggests that you are lucky to have a job that pays $9 an hour.

menu cost tax law shoeleather tax viariability of prices

An economy begins in long-run equilibrium, and then a change in government regulations allows banks to start paying interest on check- ing accounts. Recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive. a. How does this change affect the demand for money? b. What happens to the velocity of money? c. If the Fed keeps the money supply constant, what will happen to output and prices in the short run and in the long run? d. If the goal of the Fed is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change? If not, what should it do? Why? e. If the goal of the Fed is to stabilize output, how would your answer to part (d) change?

money demand increases, which means velocity velocity decreases short term: price same, quantity low. long term: fall in prices, return to quantity natural. its fine to keep money supply constant. it should increase money supply.

Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green apples. Compute a consumer price index for apples for each year.Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2? Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 2? Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 2? Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2?

prices doubled doesnt change. spending rises from $10 to $20 1 --> .5

Supply Equation made of two components together they form (IMPORTANT) things that shift this curve

private saving = (Y - T ) - C public saving = T - G national saving, S = private saving + public saving = (Y -T ) - C + T - G = Y - C - G public saving (changes in G or T) private saving (tax laws that affect saving, replace income tax with consumption tax).

CHAPTER 2 Stock: Flow: GDP: GNP: Net National Product: Imputed costs: Real Vs. Nominal GDP: Chain weighted GDP:

quantity of water in the tub at a given point in time. (capital) quantity of water being added to the tub per unit of time. (investment) Total expenditure on domestically. Income earned by nationals. GNP - depreciation of capital intangible additions to GDP (rent paid to self) Nominal measures GDP in current prices, real GDP measures these values using the prices of a base year, thus controlling for inflation by only showing changes in quantities of production. constantly updates the base year.

Fisher equation (OR) ^what does this equation mean? and Fisher effect How does expected inflation play in?

real interest rate = nominal interest rate - inflation rate nominal interest = real interest + inflation nominal interest is the opportunity cost of holding cash. (real interest rate you lose from not investing and any minuses in expected inflation) The one-for-one relation between the inflation rate and the nominal interest rate. A 1 percent increase in the rate of inflation in turn causes a 1 percent increase in the nominal interest rate. expected inflation is same as current inflation. Real interest is set, so nominal interest changes with expected inflation.

In the economy of Panicia, the monetary base is $1,000. People hold a third of their money in the form of currency (and thus two-thirds as bank deposits). Banks hold a third of their deposits in reserve. a. What are the reserve-deposit ratio, the currency-deposit ratio, the money multiplier, and the money supply? b. One day, fear about the banking system strikes the population, and people now want to hold half their money in the form of currency. If the central bank does nothing, what is the new money supply? c. If, in the face of this panic, the central bank wants to conduct an open-market operation to keep the money supply at its original level, does it buy or sell government bonds? Cal- culate, in dollars, how much the central bank needs to transact.

reserve deposit: .3333 currency deposit ratio: .5 money multiplier: 1.8 money supply: 1800 1538 buy bonds. 170.35 dollars worth.

The government raises taxes by $100 billion. If the marginal propensity to consume is 0.6, what happens to the following? Do they rise or fall? By what amounts? a. Public saving b. Private saving c. National saving d. Investment

rises by 100 billion fall by 40 billion 60 billion increase of 60 billion.

Suppose the Fed reduces the money supply by 5 percent. Assume the velocity of money is constant. a. What happens to the aggregate demand curve? b. What happens to the level of output and the price level in the short run and in the long run? Give a precise numerical answer. d. What happens to the real interest rate in the short run and in the long run? (Hint: Use the model of the real interest rate in Chapter 3 to see what happens when output changes.) Here, your answer should just give the direction of the changes.

shift down in the short term, 5% decrease in output, and in the long term, a 5% decrease in price. (because MV=PY) and V is constant. real interest: no change in short run, long run: interest rate up

A contraction in demand short term long term transition period

short run, price stays same and output falls (demand is low so firms produce less) falling prices allow firms to produce more. then we reach long term, where output returns to equilib, but prices are lower.

CHAPTER 2: Stock or flow? the balance on your credit card statement how much you study economics outside of class the size of your compact disc collection the inflation rate the unemployment rate

stock flow stock flow stock (based on number of currently unemployed people.). newly unemployed people in a month would be a flow.

Suppose that the government increases taxes and government purchases by equal amounts.What happens to the interest rate and investment in response to this balanced-budget change? Explain how your answer depends on the marginal propensity to consume.

taxes go up and consumption goes down by MPC. consumption going down should increase investment and make the interest rate fall. But with G also rising, this would indicate less investment and a higher interest rate.

demand deposits (M1) vs M2 reserves. 100-percent-reserve banking vs. fractional-reserve banking balance sheet bank capital capital requirements excess reserves The leverage ratio

the funds people hold in their checking accounts (counted as cash due to high liquidity) M1 is cash and demand deposits. M2 is M1 plus savings ect. The deposits that banks have received but have not lent out are called assumption that bank just holds on to assets in reserve until people make withdrawals vs. assumption that they are keeping portions in reserves, but creating money with the rest. a bank's accounting statement of assets and liabilities equity of the owners. the capital the bank needs to start up. required amount of this initial capital. hold extra in reserves the ratio of the bank's total assets (the left side of the balance sheet) to bank capital (the one item on the right side of the balance sheet that represents the owners' equity).

Factors of production Factor prices

the inputs used to produce goods and services (capital K and labor L). the amounts paid to each unit of the factors of production (rent/wages)

Okun's law:

the negative relationship between GDP and unemployment

monetary base is what? Monetary supply = money created by bank

the total number of dollars held by the public as currency C and by the banks as reserves R. (MB= C+R) Monetary base X money multiplier (reflective of bank reserves & peoples' currency) 1/rr * deposits

CHAPTER 1 Endogenous variables: Exogenous variables: Deflation: Negative inflation: Market clearing: Microeconomics assumes: competitive markets

those variables that a model tries to explain. those variables that a model takes as given. a decline in prices. prices below 0 level assumption that prices change and equilibrate markets. Households and firms optimize—maximize their satisfaction/profits/utility. each firm is too small to affect the markets. they take prices as given